CFA case study

Read this case study and complete it, and you need to make a cash flow statement first. Please make sure all correct.
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Company: BubblePop
Project: APPKiller
You’re the CFO of the tech company, BubblePop. Your CMO (Chief Marketing
Officer) is proposing a new product called APPKiller that will be sold online for
$10 per unit. The CMO expects sales of 100,000, 110,000, 120,000, 90,000
and 70,000 units over the products 5 year life. COGS is 20% of sales and
operating expenses are estimated at $350,000 per year. The company’s tax
rate is 30%.
The initial investment in the project is as follows.
? $1,000,000 for fixed equipment machinery
? $200,000 in initial raw materials
The machinery is depreciated over 8 years straight-line ($125,000 per year).
At the end of 5 years, the product is expected to become obsolete. The
machinery will be sold off for $600,000 at that time. Raw materials will be
sold off netting the company the $200,000 back that they had originally
invested.
FYI, the company has already spent $75k on an overpriced consultant last
year analyzing this deal. (I heard he was a college professor in RI).
Oh, and about their WACC……
? The company’s stock is trading for $20 per share. There are 50,000
shares outstanding. Company beta is 2.0. The market risk premium is
6% and the risk free rate of return is 3%.
? Corporate debt matures in 4 years and is trading at 90% on 800 bonds
with a par value of $1,000. The coupon rate is 10%. The bonds pay
coupons semi-annually (2x per year).
? The company has a small amount of Preferred stock. 2,000 shares
trading at $90. Par value is $100 and annual income on the Preferred
stock is 9.5%.
Using NPV, should the company invest in the APPKiller project?
Depreciated Value
Year
Unit cost
0
Unit Revenue
Year 1
875,000
1
10
100,000
Year 3
875,000
3
Year 4
875,000
4
1,000,000
COGS
OE
Depreciation
Total Expenses
200,000
350,000
125,000
675,000
EBIT
325,000
Taxes
97,500
NI
Add Depreciation
227,500
125,000
OCF
352,500
Investment
Initial Raw Materials
Year 2
875,000
2
(1,000,000)
(200,000)
Machinery Sale Net Price
Total Cash Flows
WACC
Stock
Bond
PS
Present Value
Cost
NPV
#######
352,500
Market Value % of total
R
1,000,000
52.63%
720,000
37.89%
180,000
9.47%
1,900,000
WACC


0.00%
0.00%
0.00%
0.00%
Use NPV Function to find PV of Cash Flows
(1,200,000)

Year 5
875,000
5
200,000
682,500
882,500

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